While markets have rallied in the past week, the Federal Reserve’s rhetoric at last month’s Jackson Hole summit makes a pivot on interest rates seem unlikely. So, despite recent gains, investors are understandably sceptical about a headlong dash back into equities.
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While markets have rallied in the past week, the Federal Reserve’s rhetoric at last month’s Jackson Hole summit makes a pivot on interest rates seem unlikely. So, despite recent gains, investors are understandably sceptical about a headlong dash back into equities.
In such an uncertain future, unsustainable government finances make bonds are equally unappetising, and this is opening the door for investors to explore a new frontier – crypto options trading.
According to leading crypto fund QCP Capital, options trading is likely to be highly attractive to institutional investors in cryptocurrencies for the coming years, especially when compared with decentralised or NFT finance.
Options trading allows investors to make significant profit on a possible rise in future stablecoin values, for example, whilst also granting them an insurance policy in more volatile crypto markets.
While trading in derivative products such as options, which gain value from an underlying commodity or market, has grown significantly in recent years, these financial instruments date back hundreds of years, long before they were first formally traded in 1973.
In fact, the first evidence of these instruments can be found in ancient Greece. Around the sixth century BC, the Greek philosopher Thales profited greatly from an option-type agreement, according to Aristotle, by predicting that the next olive harvest would be exceptionally good a year in advance.
As a poor philosopher, he had limited funds, but he used what little he had to put down a deposit on the local olive presses. Because no one knew whether the harvest would be good or bad, Thales got the rights to the presses at a low cost. When the harvest was plentiful and demand for the presses was great, Thales charged a premium price for their use and profited handsomely.
Thales had bought an option.
Fast forward thousands of years and cryptocurrency has quickly developed from its previous status as a niche asset only understood by anti-establishment programmers into a market that is expected to more than triple by 2030.
Options appear to be the right product for current uncertain times: allowing for both significant profits and a reliable method for hedging risk.
While options are sometimes viewed as the lifeblood of the commodity sector, they are now gaining traction in the global crypto investment community.
Deribit was the first exchange to provide European vanilla options backed by Bitcoin and Ether, but the crypto options market is rapidly expanding.
Until recently, investors had to convert fiat currency into cryptocurrencies such as Bitcoin before trading options on the same or other digital assets. Fortunately, prominent exchanges have changed the game by rolling out USD-margin trading.
Full-suite crypto exchange Bit.com, for example, recently launched a unique USD-margin options trading service, allowing users to buy and sell cryptocurrencies denominated and settled with US dollars, or USD-pegged stablecoins, rather than with other digital tokens.
Trading with dollars as collateral gives a solid foundation to investors, who can now fully focus on their trades rather than any possible volatility in their collateral. In fact, USD-margin trading offers a similar risk management potential as using US government bonds as collateral, as practiced by Wall Street’s primary lenders.
In the words of Toya Zhang, Bit.com CMO: “Even in bear markets, options trading continues to build momentum. The availability of decentralized, tokenized options trading with a USD-margin lays the way for a more flexible and democratic future in options trading.”
Bit.com aims to direct this tool toward becoming a standard for digital asset trading by both individuals and retail traders. Whereas other exchanges such as Hodlnaut are experiencing massive layoffs, and Genesis similarly cutting 20% of its staff, Bit.com recently announced it is looking to double its workforce, demonstrating its faith in its offerings and the potential of the crypto market.
Crypto options are attracting increasing numbers of investors and traders from traditional financial institutions because they allow investors to trade large blocks of cryptocurrencies without making large financial commitments.
Hedge fund manager Shiliang Tang, who runs LedgerPrime, a $130 million fund packed with Wall Street converts from Virtu Financial Inc. and Cantor Fitzgerald, netted a 78% return thanks to his options-powered strategies.
Whether the cryptocurrency tech sector decides to concentrate on decentralized transmission, storage, bridges, or DeFi- no-nonsense trading tools such as options trading will unquestionably play a significant role in determining the direction of the cryptocurrency markets.
Nobody knows what cryptocurrency will look like in the future, but one thing is certain: this innovative market will keep developing and adapting fluidly to shifting laws, cutting-edge technologies, and the needs of institutional and retail traders.
